Measuring the Effect of Money: Test, Estimation and Identification Mau-Ting Lin∗

This paper provides a new approach of measuring the effects of money in both the long-run and the short-run horizons. The key identifying assumptions used to identify and measure the effect of money are long-run neutrality and long-run homogeneity. The first chapter shows that both long-run propositions imply certain linear restrictions to be imposed on the cointegrating space. By testing the validness of such linear restrictions, both long-run propositions are tested. Compared with the previous long-run tests, the cointegration test in this paper does not depend heavily on the auxiliary assumptions, including identification restrictions and the correct selection of macroeconomic variables to be included in the empirical work. The second chapter shows that the linear restrictions imposed by the long-run propositions can be used to identify the monetary shocks when the long-run proposition is overidentifying. In such a case, it is proved that the monetary shocks can be identified with the following three identifying assumptions: (1) a monetary shock is long-run neutral and homogeneous; (2) monetary shocks are not correlated with other structural shocks; and (3) the long-run effect of money is linearly independent from the long-run effects of other structural shocks